S&P heads for worst week in three months as stocks face ‘reality check’

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The S&P 500 is headed for its worst week since early September after the combination of a hawkish Federal Reserve and fears of a Washington shutdown helped trigger a “reality check” for high-flying Wall Street stocks.

The benchmark fell 0.4 percent in early trade on Friday, taking its losses for the week to 3.4 percent. The decline, which has also spilled over into global stocks, is a blow to a market that has posted big gains this year, driven by the Fed’s interest rate cuts and a rally in big tech stocks.

“Euphoria is starting to flash red in some parts of the US equity market,” said Barclays strategist Emmanuel Kau.

He described this week’s selloff as a “reality check” for the frenzied buying of speculative stocks and assets like bitcoin, which surged after Donald Trump’s election victory on expectations of lower taxes and lighter regulation.

The S&P remains up more than 20 percent this year, but the sell-off put some damper on a rally that was set to deliver one of Wall Street’s best in five years so far this month.

A US government risk shutdown Washington’s failure to agree on a spending package further unnerved investors, analysts said.

The US Congress must agree to a deal by Friday night to keep the government open after the House of Representatives voted against a Trump-backed package that would suspend the debt ceiling for two years.

A sell-off in US Treasuries has already sent benchmark bond yields to six-month highs this week after the Fed signaled plans to cut just two interest rates next year, fewer than investors had expected.

Michael O’Rourke, chief market strategist at broker Jones Day, said the post-election boom “made equity markets forget that President Trump volatility is bullish”.

The VIX index of volatility, known as Wall Street’s “fear gauge,” hit its highest level this week since a brief bout of market volatility in early August.

However, Treasury yields fell on Friday after the Fed’s preferred measure of inflation showed slightly lower-than-expected price pressures.

The downbeat mood also weighed on Europe, with the region-wide Stoxx Europe 600 down 1.5 percent in choppy trading. A nearly 20 percent fall for Novo Nordisk dragged down the index after the Danish drugmaker Disappointing results reported From its latest obesity drug trial.

Trump added to the mood of caution in Europe with a message on his Truth social platform warns the EU It must commit to large purchases of US oil and gas or face tariffs.

“The market is unwilling to believe or value that Trump is serious about implementing tariffs,” said Gerry Fowler, head of European equity strategy at UBS. “Now that his comments are directed more specifically at Europe, investors are taking note.”

London’s FTSE 100 fell 0.9 percent on Friday and is on track for a 3.2 percent weekly decline – its worst since August 2023. UK markets have been battered in recent weeks by a combination of slowing growth and stubbornly high inflation, which will keep interest rates on hold by the Bank of England on Thursday.